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CHINA TO BECOME WORLD’S MAJOR ECONOMIC POWER! WHY AND HOW?- Fanie Brink

The People’s Republic of China is, according to many market analysts and commentators, fast becoming the major economic power in the world which is a very important topic almost everywhere.

Two Peking University professors, J Towson and J Woetzel, explain in their book “The One Hour China Book” six powerful economic and demographic mega-trends they have identified shaping the economy of China.

They explain that “our trends are phenomena that are generating revenue, creating big companies and minting Chinese millionaires and billionaires.” Their view is based on studying and working with thousands of individual companies.

This is about business and they do not delve into Chinese politics or state capitalism, which is the economic systems that China has embraced so successfully some years ago. They believe firmly that the business of China is mostly - business.

“The first mega-trend needed to understand is China’s urbanisation and the largest migration into urban areas in human history. In the 1980s, 80% of Chinese were living agrarian lives; soon there will be 1 billion Chinese city dwellers.

Consider the impact of this migration. It requires the building of cities, housing, buses, subways, police services, parks, roads, sewage treatment, water and electricity infrastructure, an economy to support them, and all with huge environmental impact.

Today there are 160 Chinese cities with over 1 million people – and to put this in perspective, Europe has 35 such cities.

This mega-trend is fundamentally changing the Chinese people, whose disposable income per capita has shot up over 300%. In most countries, urbanisation does not directly lead to wealth, but urbanisation is necessary for wealth. Real estate accounts for about 20% to 22% of investment in fixed assets and employs over 100 million people directly or indirectly. And construction has produced great wealth.

The second mega-trend is China’s huge manufacturing scale. This has all sorts of implications. If you are much larger than your competitors, you can outspend them on research, factories, fixed assets, marketing and other fixed costs.

The Chinese manufacturing base has increased by over 20 times in the last 30 years!

To get a sense of this size, China produces 80% of the world’s air-conditioners, 90% of personal computers, 75% of solar panels, 70% of cell phones and 63% of the world’s shoes.

China has several big advantages – a primary one is the rapidly growing domestic market to which 20 million cars are sold, versus the USA’s 16 million. To service this market, Chinese manufacturing wins against foreign competition through producing good quality, low-cost, simple as well as high-tech goods, through efficiency and scale.

The third mega-trend is China’s rising number of consumers. In 2009, 18% of the world’s middle class was Chinese and by 2030, that will rise to 66%. North America and Europe combined hold 51% currently and are forecast to drop to 21% by 2030, not because they are getting poorer, but because the Asian middle class is rising.

The huge Chinese market is getting hungrier every day. They have moved from ‘subsistence living’ to being able to purchase more aspirational goods. Their per capita GDP has risen from $200 in 1982 to $5 500 in 2015. With prosperity comes the rise in meat-eating, which is why China now has 450 million pigs, about half of the global pig population, and consumes 28% of the world’s meat. Little wonder that Kentucky Fried Chicken (KFC) is the number one fast food chain in China with 4 000 restaurants.

And like consumers everywhere, the Chinese are perpetually demanding, on price, quality, service, convenience and every other dimension.

This has a direct impact on the growth of farming, infrastructure, supermarkets, refrigerated trucks, logistics, home electricity and refrigerators, and more, to meet the growing demand for meat.

The fourth mega-trend is money, and lots of it. Capitalism requires capital and China’s financial system today will impress any capitalist anywhere, the authors point out. Their bank deposits are over $19 trillion today and growing by over $2 trillion every year. In 2016 their foreign exchange reserves were $3,2 trillion and they are the single largest foreign purchaser of US government debt. All this said, it is not only the volume but the efficiency, sophistication and architecture of China’s financial system that comes with this mega-trend. Ping An is a massive Chinese insurance and financial services company with 275 000 staff, 870 000 sales agents, over $100bn in revenue and 110 million customers. In 2015, it was worth more than Prudential, AIG and MetLife. China’s big four state-owned banks do dominate the banking sector, but they have evolved from mostly government organisations into quasi-corporate, state-owned entities.

The fifth mega-trend flows from the previous ones - China is a ‘brainpower behemoth.’ The stereotype of China as a limitless pool of factory workers, who will work long hours for low wages, is rapidly changing. In 1993, China accounted for only 2,2% of the world’s research and development investment. Today it has overtaken France, England and most European countries, surpassed Japan, and is only second to the USA.

The sixth mega-trend is the Chinese internet, which has grown so fast that Chinese has already replaced English as the primary language. China didn’t move slowly into acceptance of the internet as the West did; for them it happened all at once with videos, music, chat, games, news, dating, shopping, etc.”

The acceptance of capitalism has changed the lives of all the people in the country tremendously and it has raised the GDP to more than 10% per annum and China even had to introduced measures to slowdown the economy such as, for example, a ban on all new construction projects.

This high economic growth rate was the result of higher efficiency achieve because of higher investment in new technology development, economies of scale and higher profitability at very competitive prices in the world markets which has made China on the biggest trading partners of the USA, but which has unfortunately led to the present trade war between the USA and People’s Republic of China.

South Africa

The Reserve Bank in South Africa, however, just as all the Central Banks in many other countries in the world, believe that it can, according to its mandate in terms of sections 223 to 225 of the Constitution and the Reserve Bank Act (1989) “… achieve and maintain price stability in the interest of balanced and sustainable economic growth” and through that also protect the currency which are basically almost impossible to achieve with monetary policy.

The prices of goods and services (inflation), the price of the Rand against other international currencies (exchange rates) and economic growth (profit = difference in the prices of inputs and outputs, as well as, technology) are in fact determined by all the local and international factors that influence the buyers and sellers (and speculators) to decide at what prices they are willing to buy or to sell products and services, the Rand and the inputs and outputs of the economy. (Economics 101, chapter 1, page 1).

Higher inflation is not only a problem of higher demand, but it can just as well be increased because of developments on the supply side of the economy such as a serious drought that affects the prices of agricultural and food products or a reduction in the production of crude oil by the oil-producing countries in the world to increase the international price of oil which also increases the international and local prices of fuel.

“The influence of interest rate policy of the Bank on these variables play a very insignificant role and is almost negligible small and statistical analysis has shown that there is absolutely no evidence that the changes in interest rates can explain or declare the changes in the inflation and exchange rates, as well as economic growth, and that influence of monetary policy is, therefore, insignificant and irrelevant. “

“Monetary policy has a very limited impact on economic growth because profit is created through, firstly, the changes in the relationship between the prices of all inputs used in the economy and changes in the prices of all outputs, including products and services produced and delivered, and secondly, the efficiency with which the inputs are converted into outputs, which is determined and can be increased mainly by the application of the best and latest technological developments, as mentioned.

The role of monetary policy in promoting ‘balanced and sustainable economic growth’ or ‘ensuring that the socio-economic well-being of people is protected’ is therefore extremely limited. The influence of interest rates on the supply side of the economy is by no means as important as generally accepted, as it is only one of the four main inputs used in production, manufacturing and service delivery. The other three main inputs are land and raw materials, labour and management.

The mind-boggling question is, therefore, why do the central banks in the world want to keep the consumers responsible and punish them for every “negative” move in the inflation for which they are not responsible for when the monetary policy of the Banks do not even have the slightest control over or influence on the reasons how prices in the world are determined by supply and demand? The question is how can they accept that the stabilisation of prices can solve almost all the problems in the economy when it is, in fact, the biggest, single delusion in the total economic science?

“If there is a single development that has seriously gone wrong in the world economy, it would be the general acceptance that all other economic variables, such as interest and exchange rates and even economic growth, are more important and have a greater role in the economy to play than the market forces of the demand and supply of products and services.

The governments in the world should drastically reduce their involvement and interference in the economy and will have to acknowledge and accept that the producers, manufacturers, traders and service providers on the supply side, and the consumers on the demand side, are in fact the largest and most important role players in the economy, as the creators of economic growth, prosperity and progress in the world.”

As long as the ANC clings to a policy of socialism, populism and communism, it can completely forget about creating economic growth. The only reason why the low growth in the country is still achieved is because there are still entrepreneurs in the private sectors that can manage the economic and business risks associated with the political and economic policy of the government and can create sustainable profits and generate capital formation for reinvestments.

The time has come for the ANC government to make the decision to finally stop the destruction of the huge potential economic growth, wealth and prosperity of the country with its socialistic and communistic political and economic ideology through the radical economic transformation and the redistribution of all the assets of the country, its black economic empowerment and freedom, as well as its general acceptance of corruption as the shortcut to personal enrichment.

The only way how the economy in South African can be restored is a total return to a capitalist economic system which today is the only successful system in the world that drives and creates economic growth through the profit motive to generate capital for reinvestment and higher growth, with the necessary built-in socio-economic obligations that the political dispensation requires.

The distribution of wealth will not solve the problems of inequality, poverty and unemployment because it is only a short-term solution until it is all consumed and digested, which will then only magnify these problems even further. The only solution is the creation of higher economic growth and the accumulation of more wealth for everybody in the country in the same manner as it happened before 1994.